PC and printer pioneer’s top executives change their tone on Xerox bid as earnings decline from previous holiday season, come in below expectations

There may be a thaw in HP Inc.’s merger standoff with Xerox Holdings Corp.

During a call with reporters and analysts ahead of the release of its first-quarter earnings Monday, HP’s
(NYS:HPQ)
two highest-ranking executives left open the door to a combination with the printing company, but only under strict conditions. Xerox has been trying to force a merger since November, but HP has so far blocked its entreaties.

Chief Executive Enrique Lores said Monday, however, that HP is “reaching out to Xerox to explore if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan.” In a conference call with analysts late Monday, Lores indicated discussions with Xerox had started.

The companies must find ways to reduce costs and invest in areas to grow in order to find a match, Lores and HP Chief Financial Officer Steve Fieler told MarketWatch. Xerox’s
(NYS:XRX)
latest bid of $24 a share, announced Feb. 10, “meaningfully undervalues HP, creates significant risk and compromises the future of our company,” said Lores, who took over as CEO on Nov. 1.

See also: Xerox raises bid for HP to $24 a share

In an announcement, HP detailed three issues with the Xerox bid: “a fundamentally flawed value exchange,” “an irresponsible capital structure,” and overstated synergy possibilities. HP said it would discuss a potential deal to see “if there is a combination that creates value for HP shareholders that is additive to HP’s strategic and financial plan.”

The slight change in stance toward Xerox arrived as HP announced its latest strategic plan, which seeks to cut more than $1 billion in structural costs for the 2022 fiscal year. HP plans to return $16 billion to shareholders through the 2022 fiscal year, and increased its share-repurchase authorization to $15 billion Monday. “We have a winning plan,” Lores said in a conference call with analysts.

The stock buyback plan could make Xerox’s takeover bid more difficult despite HP’s change in tone, confusing some analysts during the conference call.

See also: Opinion: HP sends mixed message on Xerox while business continues to decline

HP shares were up 6% in after-hours trading Monday and up 4.4% premarket Tuesday.

HP also reported first-quarter earnings, showing a decline from the previous holiday quarter and results that were slightly short of Wall Street estimates. The original Silicon Valley garage startup reported net income of $678 million, or 46 cents a share, in the quarter, compared with net income of $803 million, or 51 cents a share, in the year-ago first quarter. Revenue dipped slightly to $14.62 billion from $14.71 billion a year ago, largely due to a 7% decline year-over-year in printing.

Analysts surveyed by FactSet had expected net income of 48 cents a share on sales of $14.63 billion.

HP forecast second-quarter EPS of 46 cents to 50 cents a share -- short of the 53 cents a share forecast by FactSet.

The quarterly results represent Lores’s first since taking over as CEO, but also come against a backdrop of corporate internecine warfare. Late Thursday, HP implemented a shareholder rights plan, or “poison pill,” to make it more difficult for Xerox to proceed with its hostile takeover bid, as a three-month battle between the two companies continued.

See also: HP names head of printer division as new CEO

“The HP board clearly adopted a poison pill because our offer is receiving overwhelming support from their shareholders. Regardless of what the company and its army of advisers announce Monday, we believe HP shareholders appreciate that the value we could create by combining Xerox and HP outweighs — and is incremental to — anything HP could achieve on its own,” a Xerox spokesperson said in an email to MarketWatch last week. “Despite the HP board’s intention to deny shareholders the chance to choose for themselves, we will press ahead with our previously announced tender offer and electing our slate of highly qualified director candidates.”

HP shares are down 7.5% over the past 12 months. The broader S&P 500 index
(S&P:SPX)
has gained 15.4% in the past year.

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